Senators rebuff loophole closing

O'Malley measure to tax profits sent out of state rejected

November 07, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

As the Maryland General Assembly considered closing a loophole to prevent corporations from entirely avoiding state taxes, Marriott International Inc. warned legislators yesterday that it might "adjust operations" if they alter the tax system.

While the Bethesda-based hotel operator insists that it pays taxes and stopped short of saying that it would move, business and economic development leaders are worried that fewer companies are choosing to call Maryland home. A dozen major Maryland companies have been bought out this year, often becoming branches of companies with headquarters elsewhere.

The state's corporate landscape helps explain why the General Assembly has balked at passing Gov. Martin O'Malley's proposal for "combined reporting," which proponents say would prevent multistate corporations from shifting profits to states with lower or no corporate income tax. A Senate committee rejected the measure yesterday.

"The folks who don't want to see it get enacted have been an especially organized and effective lobby, that's part of it," said Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a Washington think tank. "Another part of it is that lawmakers are justifiably concerned about the economic development impact of any tax change they enact."

Debbie M. Harrison, a Marriott vice president, said: "We just want to make sure that companies are still incentivized to be here, and we are really disturbed by allegations that corporations are tax cheats." She added: "We are not threatening to move."

"Combined reporting" measures were defeated in previous legislative sessions. O'Malley included the proposal in a package to close a projected $1.7 billion budget deficit during the current special session.

O'Malley also proposed raising the corporate income tax from 7 percent to 8 percent, and closing another loophole that allows many developers to avoid paying transfer and recordation taxes on the sale of property.

More than 20 states have adopted combined reporting, as public outrage has grown over so-called "zero tax" corporations.

But the proposal was rejected yesterday by a Senate committee. While the special session is expected to last at least another week, during which the proposals could be revived, legislative leaders say that's unlikely.

The Senate committee did approve the transfer tax and the corporate income tax increase.

Lawmakers are keenly aware of how their actions affect companies. Marriott threatened to leave Maryland in 1999 and won up to $44 million in loans, grants and tax credits from the legislature to keep its headquarters in Montgomery County. The concessions followed a bidding war with Virginia, which angled for the company to move there.

Many lawmakers also remember when credit-card giant MBNA Corp., once a subsidiary of a Baltimore-based bank, left for Delaware in 1982 after the legislature refused to lift caps on the interest rates lenders could charge. Bank of America Corp. acquired MBNA two years ago.

Among the major corporations lining up against combined reporting in Maryland are defense contractor Northrop Grumman Corp., Maryland's largest for-profit employer; Salisbury-based Perdue Farms Inc. and BP Solar, a subsidiary of oil giant BP that manufactures solar panels in the state. The Maryland Chamber of Commerce also opposed the idea.

Baltimore-based Constellation Energy Group Inc., parent of Baltimore Gas and Electric Co., lobbied for combined reporting, saying that method would conform with federal tax law and simplify the process.

Karen Syrylo, a tax analyst for the Chamber of Commerce, said that under the proposal, some companies with operations outside the state could end up paying less, while a handful of companies with their national or regional headquarters here would pay more.

"When it's beneficial for them they like it," House Speaker Michael E. Busch said. "When it's not beneficial for them, they don't like it."

The issue has been clouded by uncertainty over which companies are currently paying. Comptroller Peter Franchot recently reported that nearly half of Maryland's largest for-profit companies did not pay corporate income taxes in 2005. He did not identify which companies didn't pay taxes, noting confidentiality laws.

The chamber says Franchot's report is misleading and wrong.

Another study by the Institute on Taxation and Economic Policy found that Marriott paid zero state corporate income taxes in 2001 despite profit of $410 million. Marriott officials insist that they did pay taxes in 2001, but the study's authors stand by it and note that Marriott discloses its state income tax burden in its Securities and Exchange Commission filings.

A Senate committee called for a study of combined reporting. "There isn't enough information out there as to who wins and who loses," said Sen. Nancy J. King, a Montgomery County Democrat.